Supreme Court’s Stay of Clean Power Plan Fails an Economic Test

On February 9, 2016, the Supreme Court issued a surprising decision to halt implementation of the Environmental Protection Agency’s Clean Power Plan until the resolution of the rule’s legal challenges. The court did not explain its action, but one of the central arguments for the stay was that the rule would impose large, immediate, and irreparable costs to the coal sector. We analyze these claims in a recent paper and conclude that the stay was unjustifiable based on economic harm to the coal sector.

This conclusion is based on an analysis of prevailing trends in the electric power sector and an understanding of the timing and flexibility for complying with state emissions targets. Recent developments in the electricity sector have caused a dramatic shift away from coal and toward cleaner generation sources. Since 2007, shale gas development in the United States has expanded, leading to lower natural gas prices. At the same time, technological progress and policies supporting renewable energy have reduced the cost and improved the performance of wind and solar power—and other environmental regulations have raised the cost of coal-fired generation. The Clean Power Plan will continue this shift away from coal as a generation fuel, but the rule is by no means the most important source of pressure on the coal sector.

These trends, along with the 2008–2009 economic recession, have contributed to the decade-long reduction in carbon emissions depicted in the figure. The Clean Power Plan will continue the path of lower emissions, although at a less rapid pace than has been observed in the last decade. Our modeling shows that the overall cost of the policy will be low. Indeed, our analysis and that of MJ Bradley & Associates suggest that costs will be close to zero through the mid-2020s—and will be far outweighed by the public benefits of the policy.

However, the Clean Power Plan will likely pose large costs to individual coal-fired plants and coal mines, leading to some retirements and shutdowns. But the timing of these costs, which is central to the arguments that business groups made when requesting the stay, does not support the Supreme Court’s decision. The stay is only justified based on harm to the coal sector if costs occur during the period of litigation, if they are significant enough to threaten the existence of the business and if they cannot be recovered later. The trends depicted in the figure contradict these claims, as does our modeling of the Clean Power Plan, which shows that although the rule will increase pressure on the coal sector, this pressure does not begin until about a decade from now.

Moreover, option theory suggests that even if the rule required steeper emissions reductions at an earlier date than it actually does, firms would delay compliance decisions until the litigation is resolved. The Clean Power Plan does not require specific strategies to reduce emissions; instead, it provides flexibility to pursue the best strategies available. This flexibility allows businesses to delay decisions that cannot be undone, such as retiring a coal-fired plant, until well after the litigation period. The ability to delay these decisions means that claims of immediate and irreparable harm to the coal sector are unfounded.

In recent months, attention has shifted toward considering the implications of the stay for the regulatory timeline. For example, today's hearing of the Senate Environment and Public Works Committee examined that question. Industry groups have argued that all compliance deadlines should be delayed. However, this argument makes little economic sense because the stay only serves to allow business to delay decisions that they would have delayed anyway. This argument may also make little legal sense.

At the hearing, claims were also made that the rule will cause huge increases in electricity prices and large costs to electricity consumers. Our analysis suggests that, because of the trends and current compliance timeline, the Clean Power Plan will cause minimal increases in electricity prices for at least a decade.

The claims of large, immediate, and irreparable costs to the coal sector during the ongoing judicial review of the Clean Power Plan are not supported by economic reasoning. To the extent that these claims played a prominent role in the Supreme Court’s decision to stay the rule, the stay appears unjustified. However, we anticipate that the stay, by itself, will have little effect on the coal industry or US emissions. Using the stay to push back compliance deadlines (which would also be economically unjustified) could slow international momentum to curb greenhouse gas emissions and have a detrimental—and very real—effect on the global climate.

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